Retail

J.C. Penney's 2% Turnaround Much Too Weak

J.C. Penney Co. Inc. (NYSE: JCP) announced that its same-store sales rose 2% in the final quarter of 2013, and its CEO said the most difficult part of its turnaround is over. That is not true, and some of J.C. Penney’s most difficult days may be ahead. It has set painfully modest goals, and it could easily miss them.

For the most recently reported period, J.C. Penney posted revenue of $3.78 billion, compared to $3.88 billion in the fourth quarter of 2012, which included an additional week. The retailer’s operating loss was $138 million, compared to a loss of $745 million in the same period a year ago.

CEO Myron E. (Mike) Ullman, III said:

With the most challenging and expensive parts of the turnaround behind us, we will focus on improving gross margin, managing expense and steadily growing our sales in 2014. Our strategic plan seeks to enhance performance across all of the key drivers of our business: merchandising, marketing, store experience, jcp.com, our teams, and our operations. The goal is to deliver consistently improving financial results, and to restore JCPenney as a leader in American retail.

J.C. Penney reported it expects same-store sales in the current quarter will rise 3% to 5%, and in the mid-single digits for all of 2014. The company only needs to slip slightly below those goals for the “turnaround” to end. J.C. Penney continues to face problems due to the age of its stores and the crushing competition it faces from larger retailers like Target Corp. (NYSE: TGT).

J.C. Penney’s balance sheet remains terribly weak. It has only $1.5 billion in cash, against long-term debt of $4.8 billion. For the first through the third quarters of 2014, it will not be helped by the surge of holiday sales. J.C. Penney has to hold its own over the course of nine months, a prospect that will be difficult, if not nearly impossible.

Several large retailers already have expressed worry about 2014 results. Some have indicated that cold weather has kept customers away and those people may not return for what they did not buy during the winter. Consumer sentiment has been shaky recently. Gasoline prices are rising. Unemployment remains stubbornly high, particularly among people in the lower middle class — a group that represents many of J.C. Penney’s shoppers.

J.C. Penney shares continue to trade near a multidecade low. If it staggers, even a bit, in the recovery it claims is in progress, whatever modest optimism its fourth-quarter earnings have brought it will be extinguished.

See also 24/7 Wall St.’s review of J.C. Penney’s recent earnings.

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